Chapter 21, Problem 6BTN

1)

To determine

Introduction:

Contribution Margin:

• Contribution Margin refers to the excess of Sales revenues over variable and fixed costs. Since it contributes to the overall profitability of the business it is referred to as contribution margin.

• Variable costs refer to the costs of manufacture that have a direct co-relation with the volume of the goods manufactured, i.e. the costs increase with an increase in the goods produced. Examples are costs of direct material and direct labor.

• Fixed costs refer to the costs of manufacture that have an inverse co-relation with the volume of the goods manufactured, i.e. the costs decrease with an increase in the goods produced. Examples are costs of factory rent, depreciation on plant and equipment

  $\text{Contribution per unit = Sales price per unit -}\text{}\text{}\text{ Variable Costs per unit}$

Breakeven Point:

• Breakeven point is the monetary value of sales or number of units of sales where the contribution equals the fixed costs and the profit / loss is zero.

• Breakeven point is considered as the minimum sales needed to sustain a business without incurring losses.

  $\begin{array}{l}\text{Breakeven point (Units) = Fixed Cost / Contribution Per Unit}\\ \\ \text{Breakeven point (Value) = Sales Price per unit x Breakeven Point (units)}\end{array}$

To Prepare:

One year multi product breakeven analysis

Answer to Problem 6BTN

Solution:

Particulars	Beverages	Sandwiches	Burgers	Sides	Deserts	Total
Sales	$5.00	$35.00	$50.00	$25.00	$30.00	$145.00
Variable Costs	$0.50	$8.75	$17.50	$7.50	$12.00	$46.25
Contribution Margin	$4.50	$26.25	$32.50	$17.50	$18.00	$98.75
Contribution Margin (%)	90.00%	75.00%	65.00%	70.00%	60.00%	68.00%
Sales Mix	6	5	4	3	2	20.00
Fixed Costs						$500,000.00
Breakeven point (Units)	1,519.00	1,265.00	1,013.00	760.00	507.00	5,064.00
Breakeven point (Value)	$7,595.00	$44,275.00	$50,650.00	$19,000.00	$15,210.00

Explanation of Solution

• Sales price per unit is assumed as $5.00, $35.00, $50.00, $25.00 and $30.00 for Beverages, Sandwiches, Burgers, Sides and Deserts respectively.

• Composite sales price is calculated by multiplying the Individual Sales price by value of sales mix per product respectively to calculate the weighted average sales price

• Variable Costs per unit is assumed as $0.50, $8.75, $17.50, $7.50, $12.00 for Beverages, Sandwiches, Burgers, Sides and Deserts respectively.

• Contribution Margin per unit is calculated as difference of Sales price per unit and Variable cost per unit and is $4.50, $26.25, $32.50, $17.50 and $18.00 for Beverages, Sandwiches, Burgers, Sides and Deserts respectively.

• Sales Mix is assumed as 6:5:4:3:2 for Beverages, Sandwiches, Burgers, Sides and Deserts respectively.

• Composite variable cost is calculated by multiplying the Individual Variable costs price by value of sales mix per product respectively to calculate the weighted average variable costs

• Annual fixed costs are $500,000 shared by all the products. Breakeven point in units is calculated as Annual Fixed costs by Composite Contribution and is 5,064 composite units.

• Breakeven point in units for each individual product is calculated as product of proportion of sales mix per product and 5,064 composite units and is 1,519.00, 1,265.00, 1,013.00, 760.00 and 507.00 for Beverages, Sandwiches, Burgers, Sides and Deserts respectively.

• Breakeven point in value is calculated for each product as Breakeven point in units per product multiplied by individual selling price and is $7,595.00, $44,275.00, $50,650.00, $19,000.00 and $15,210.00 for Beverages, Sandwiches, Burgers, Sides and Deserts respectively.

Conclusion

Hence the one year multi-product breakeven analysis is performed.

2)

To determine

Introduction:

Contribution Margin:

• Contribution Margin refers to the excess of Sales revenues over variable and fixed costs. Since it contributes to the overall profitability of the business it is referred to as contribution margin.

• Variable costs refer to the costs of manufacture that have a direct co-relation with the volume of the goods manufactured, i.e. the costs increase with an increase in the goods produced. Examples are costs of direct material and direct labor.

• Fixed costs refer to the costs of manufacture that have an inverse co-relation with the volume of the goods manufactured, i.e. the costs decrease with an increase in the goods produced. Examples are costs of factory rent, depreciation on plant and equipment

  $\text{Contribution per unit = Sales price per unit -}\text{}\text{}\text{ Variable Costs per unit}$

Breakeven Point:

• Breakeven point is the monetary value of sales or number of units of sales where the contribution equals the fixed costs and the profit / loss is zero.

• Breakeven point is considered as the minimum sales needed to sustain a business without incurring losses.

  $\begin{array}{l}\text{Breakeven point (Units) = Fixed Cost / Contribution Per Unit}\\ \\ \text{Breakeven point (Value) = Sales Price per unit x Breakeven Point (units)}\end{array}$

Results of One year multi product breakeven analysis

Answer to Problem 6BTN

Solution:

• For a restaurant having five major food groups and annual fixed costs of $500,000, approximately 5,064 composite units have to be sold annually in order to break even and individual breakeven volume of goods is 1,519.00, 1,265.00, 1,013.00, 760.00 and 507.00 for Beverages, Sandwiches, Burgers, Sides and Deserts respectively.

• Breakeven sales value is calculated for each product as Breakeven point in units per product multiplied by individual selling price and is $7,595.00, $44,275.00, $50,650.00, $19,000.00 and $15,210.00 for Beverages, Sandwiches, Burgers, Sides and Deserts respectively.

• The volume is based on the sales mix and contribution margin percentage of 90.00%, 75.00%, 65.00%, 70.00% and 60.00% for Beverages, Sandwiches, Burgers, Sides and Deserts respectively. Any change in contribution margin percentage would have a direct impact on the volume of goods to be sold to breakeven.

• For instance if there is a decrease in the volume of the beverages sold then the other products will have to compensate by increasing the volume of goods sold in order to ensure breakeven contribution margin is achieved.

Explanation of Solution

Particulars	Beverages	Sandwiches	Burgers	Sides	Deserts	Total
Sales	$5.00	$35.00	$50.00	$25.00	$30.00	$145.00
Variable Costs	$0.50	$8.75	$17.50	$7.50	$12.00	$46.25
Contribution Margin	$4.50	$26.25	$32.50	$17.50	$18.00	$98.75
Contribution Margin (%)	90.00%	75.00%	65.00%	70.00%	60.00%	68.00%
Sales Mix	6	5	4	3	2	20.00
Fixed Costs						$500,000.00
Breakeven point (Units)	1,519.00	1,265.00	1,013.00	760.00	507.00	5,064.00
Breakeven point (Value)	$7,595.00	$44,275.00	$50,650.00	$19,000.00	$15,210.00

• Sales price per unit is assumed as $5.00, $35.00, $50.00, $25.00 and $30.00 for Beverages, Sandwiches, Burgers, Sides and Deserts respectively.

• Composite sales price is calculated by multiplying the Individual Sales price by value of sales mix per product respectively to calculate the weighted average sales price

• Variable Costs per unit is assumed as $0.50, $8.75, $17.50, $7.50, $12.00 for Beverages, Sandwiches, Burgers, Sides and Deserts respectively.

• Contribution Margin per unit is calculated as difference of Sales price per unit and Variable cost per unit and is $4.50, $26.25, $32.50, $17.50 and $18.00 for Beverages, Sandwiches, Burgers, Sides and Deserts respectively.

• Sales Mix is assumed as 6:5:4:3:2 for Beverages, Sandwiches, Burgers, Sides and Deserts respectively.

• Composite variable cost is calculated by multiplying the Individual Variable costs price by value of sales mix per product respectively to calculate the weighted average variable costs

• Annual fixed costs are $500,000 shared by all the products. Breakeven point in units is calculated as Annual Fixed costs by Composite Contribution and is 5,064 composite units.

• Breakeven point in units for each individual product is calculated as product of proportion of sales mix per product and 5,064 composite units and is 1,519.00, 1,265.00, 1,013.00, 760.00 and 507.00 for Beverages, Sandwiches, Burgers, Sides and Deserts respectively.

• Breakeven point in value is calculated for each product as Break-even point in units per product multiplied by individual selling price and is $7,595.00, $44,275.00, $50,650.00, $19,000.00 and $15,210.00 for Beverages, Sandwiches, Burgers, Sides and Deserts respectively.

Conclusion

Hence the one year multi-product breakeven analysis is performed.